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Howes: Glow of ‘golden age’ obscures big challenges ahead for autos

Record sales and North American profits of nearly $80 billion over the past four years understandably evoke talk of a new “Golden Age” for Detroit autos.

History guided by experience should say otherwise. For all the optimism surrounding this year’s Detroit auto show, opening to the public Saturday at Cobo Center, there’s a clear sense the industry that helped put the world on wheels faces transformational change it cannot fully control.

Here are five takeaways from the North American International Auto Show:

The biggest challenge to Detroit’s automakers aren’t the Japanese or the Germans, the Koreans or the Chinese. It’s their cash-rich friends in Silicon Valley, a metaphoric construct of Apple and Google, startups and software jockeys, Tesla and Israeli entrepreneurs, pretty much anyone with an idea that can strip Detroit of revenue and customers.

Not that the likes of General Motors Co. CEO Mary Barra or her counterpart at Ford Motor Co., Mark Fields, would say so. Outwardly, the talk is of partnership — GM’s deal with Lyft Inc., the ride-sharing software company, or Ford’s prospective (but not complete) arrangement with Google Inc., or Sergio Marchionne saying talks with those companies are “ongoing.”

Reality is less magnanimous. Inwardly, the auto industry synonymous with American industrial might, decline and recovery is racing to ensure one or more of its cohort won’t become the next Kodak, the Rochester-based film giant that ignored the innovation of digital photography until it was too late.

The car business is changing because the march of technology, coupled with an expectation of connectivity and customization, is lowering barriers to enter pieces of the business. That has existential implications for a century-old industry built on a foundation of engines, transmissions and fossil fuels.

More, the automotive club is expanding. Just a few years ago, Silicon Valley heavies played bit roles at the Detroit show, if any. Not anymore. At a news conference Thursday featuring Transportation Secretary Anthony Foxx, Google and Tesla shared space with GM, Ford, Fiat Chrysler Automobiles NV and Delphi Automotive to implicitly support uniform standards for developing autonomous vehicles.

The message: next-generation mobility will not belong just to Detroit and its traditional competitors. Add aggressive federal fuel-economy targets of 54.5 mpg by 2025, and it’s pretty easy to understand why GM, Ford, Toyota and others cannot play the either/or game. They have to do both.

Second, the good times are on borrowed time. The industry is entering a seventh straight year of what is expected to be another banner year for auto sales. Even if projections prove by this time next year to be reasonably accurate, few expect the pace to continue.

A slowdown would challenge those with heavier debt loads, thinner profit margins, comparatively little exposure to alternative powertrains and limited capacity to invest in both core product lines and “mobility solutions” for the future. Want to know why FCA’s Marchionne is trolling for a partner? This is it.

Third, government regulation is driving the industry more than ever before. Where optimists see a new era of partnership, pessimists see bureaucratic coercion bolstered by a willingness to levy multibillion-dollar fines and threaten criminal prosecution.

Cooperation and harmony with the feds, real or imagined, are the cost of doing business. Over time, the carrot-and-stick approach is likely to harmonize standards governing the industry and cease making safety and fuel-economy competitive clubs wielded between rivals.

Fourth, labor is no longer a problem to be solved. It’s one of many variables to manage in the context of overall costs. Labor accounts for the smallest share of total vehicle costs since probably the 1950s, when contract innovations like defined-benefit pensions and company-paid health care started becoming fixtures in United Auto Workers contracts.

The trend is not likely to change substantially. Over the past decade — and particularly during the global financial meltdown that precipitated historic auto bankruptcies — leadership on both sides developed working relationships grounded in reality and candor. Both are far better than the alternative.

Finally, Wall Street still doesn’t truly believe in the New Detroit. For evidence, look no further than the range-bound share prices of GM and Ford. Seven years of improving performance, more than $70 billion in adjusted North American operating profit and robust returns on invested capital still are not enough to persuade investors they’re for real.

It’ll take two things, fundamentally, to answer skeptical investors wondering whether Old Detroit still lives: first, weathering another downturn without an assist from the American taxpayers and without beggaring investment in vital product programs.

And second, demonstrating that automakers can successfully negotiate the transformational threats of Silicon Valley to traditional pieces of the business. If they fail, Kodak won’t be the only one left behind in the innovation graveyard.